BERLIN (Reuters) - Germany's business lobbies on Wednesday praised plans to relax fiscal rules for defence spending and introduce a 500 billion-euro ($535 billion) infrastructure fund but said regulatory reforms remain essential for driving economic growth.

The parties hoping to form Germany's next government on Tuesday agreed to create a 10-year infrastructure fund and overhaul borrowing rules to revamp the military and revive growth in Europe's largest economy.

"This is an important signal to stop the dangerous downward spiral of lack of investment and weak growth and to become capable of defence," Tanja Goenner, the head of German industry association BDI, said.

Increasing competition from abroad, high energy costs, elevated interest rates and uncertain economic prospects have taken their toll on the German economy, which contracted in 2024 for the second year in a row.

The swiftness of the conservative CDU/CSU and Social Democrats in reaching an agreement after two days of negotiations sends a positive signal about the future government’s ability to implement decisive policies, improving certainty for companies and consumers, economists said.

"It could also provide an important counterbalance to the uncertainties surrounding U.S. trade policy," Maximilian Kunkel, chief investment officer for Germany at UBS, said.

As high energy prices remain one of the biggest challenges facing Germany's industrial firms, investments in power grid infrastructure, renewable energy expansion, and climate-neutral industrial modernisation, should be prioritised to boost growth, Claudia Kemfert from German economic research group DIW said.

"This will not solve all problems overnight, but in terms of its dimensions it is going in absolutely the right direction," Helmut Dedy, the head of the German Association of Cities, said.

Structural reforms, greater efficiency in budget allocation, and a clear prioritisation of investments were essential for enhancing public investment capacity, Goenner said.

"The efficient use of funds must be the top priority, not only in the special fund, but in the entire budget," she added.

Without cutting red tape, accelerating approvals and filling skilled staff shortage, the fund could lead to immense cost increases, DIHK Chamber of Commerce and Industry said.

"Debt alone does not solve any problems. We need a reform package with great freedom and noticeably less regulation, as well as cost relief for companies and a faster state," Peter Adrian, DIHK president, said.

($1 = 0.9342 euros)

(Reporting by Riham Alkousaa and Rene Wagner; Editing by Ludwig Burger and Sharon Singleton)